GST on Capital Goods

Meaning of Capital Goods

According to section 2(19) of the CGST Act Capital Goods means goods, the value of which is capitalised in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business.

A. Input Tax Credit on Capital Goods

To avail input tax credit for the Capital Goods the following conditions, in addition to conditions as stated under section 16(2) of the CGST Act, are to be fulfilled.

1. The Capital Goods has been capitalised in books of account of the person and

2. The Capital Goods are used or intended to be used in the course or furtherance of business.

3. The conditions as stated under section 16(2) of the CGST Act are as under:

3.1 The registered person is in possession of Tax Invoice;

3.2 The registered person has received Capital Goods;

3.3 The tax charged on such capital goods has been paid and

3.4 The GST Return has been filed in regard of such of Capital Goods by the Supplier.

4. The further condition as stated in section 16(3) is that where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961 (43 of 1961), the input tax credit on the said tax component shall not be allowed.

5. Blocked Input Tax Credit – Input Tax Credit is blocked on Motor Vehicles, Vessels and Aircrafts subject to exceptions as per section 17(5) of the CGST Act.

6. Total amount of Input Tax Credit is allowed on purchase of capital goods. It is not like with provisions of VAT, Service Tax etc. where input Tax Credit was allowed in instalments year wise.

B. Treatment of Availed Input Tax Credit on Sale of Capital Goods

In case of supply of used Capital Goods on which input tax credit has been availed, we should consider provisions of section 18(6) of the CGST Act read with rule 44(6). The higher amount of tax shall be paid out of tax charged on transaction value or pro rata input tax credit pertaining to unused period. The following example would help for more clarification in regard of this matter.

For example capital goods purchased worth Rs. 100000/= in the month of July 2017 and input tax credit @ 18% i.e. Rs.18000/= paid and availed in the month of July 2017. This capital goods has been sold out in the month of August 2019. The person has used this capital goods from July 2017 to August 2019 i.e. for 26 months.

Useful Life of the Capital Goods is 5 years according to Rule 44(1)(b) i.e. 60 months

Remaining unused life of the Capital Goods is 34 months ( 60-26 ).

The Capital Goods has been sold for Rs. 60000/- and tax charged Rs.10800/-.

Total Input Tax Availed = Rs.18000/=

Useful Life of the Capital Goods = 60 months

Period of Capital Goods Used = 26 months

Unused period of Capital Goods = 34 months

Tax on Pro rata basis for unused period i.e.34 months = Rs.10200/- ( Total Input Tax Availed (18000)/ Useful Life of the Capital Goods(60) * Unused period of Capital Goods (34) )

Since the tax Rs.10800/= charged on transaction value of the Capital Goods is more than the tax Rs.10200/= calculated for unused period of the Capital Goods, therefore the higher amount of tax Rs.10800/= shall be paid.

In the above example if the supply of the Capital Goods is made for Rs.50000/= and tax Rs.9000/= be charged on this supply then higher amount of the tax Rs.10200/= calculated for unused period of the Capital Goods shall be paid.

C. Input Tax Credit not allowed on Capital Goods

The Input Tax Credit is not allowed on Capital Goods on following circumstances:

1. If the Capital Goods are not capitalised in the books of account.

2. If the Capital Goods are purchased for non business purpose.

3. If the Capital Goods are purchased to be used exclusively for exempt supply.

D. Circumstances when availed Input Tax Credit against Capital Goods shall be paid.

The Registered Person shall have to pay input tax credit against availed input tax against purchase of Capital Goods in following cases:

1. When the Registered Person shifts from regular registration to Composition Scheme and

2. When the Registered Person gets his registration cancelled.

How much amount shall be paid we should consider section 18(4) of the CGST Act read with rule 44 in the case of shifting from Regular Registration to Composition Scheme and section 29(5) read with rule 44 in the case of cancellation of registration.

We can understand, how much amount shall be payable, through following example.

Useful Life of the Capital Goods is 5 years.

Capital goods have been in use for 4 years, 6 month and 15 days.

The useful remaining life in months= 5 months ignoring a part of the month

Input tax credit taken on such capital goods= C

Input tax credit attributable to remaining useful life= C multiplied by 5/60

Thus if the registered person availed input tax credit of Rs.18000/= then for remaining life of 5 months he shall have to pay Rs.1500/= ( 18000*5/60 ).

E. Reversal of Input Tax Credit as required under Rule 43(1) of the CGST Act

1. When the capital goods being partly used for taxable supply and partly used for exempted supply in that case input tax credit on such capital goods shall be reversed as much as it ( common input tax credit ) attributable to the exempted supply. We can understand this with following example:

Common Input Tax Credit of Capital Goods = A
Total of Common Input Tax Credit of A = Tc
Useful Life of Capital Goods = 60 months
Input Tax Credit attributable to a tax period = Tm
Calculation of Tm = Tm = Tc/60
Input Tax Credit on all common capital goods = Tr = Tm+Tm+Tm+……… i.e. total of Tm
Amount of common credit attributable towards the exempted supply = Te
Calculation of Te = ( E/F ) * Tr

Where

E = the aggregate value of exempt supply made during the tax period and

F = the total turnover in the state of the registered person during the tax period

S.No.	Tax Period	Total Turnover ( F )	Exempted supply ( E )	Opening Tr	Addition of Tm	Closing Tr	Te Reversal of Input Tax
1	Jul	100000	10000	6000	0	6000	600
2	Aug	120000	25000	6000	500	6500	1354
3	Sep	No Turnover	No Turnover	6500	0	6500	1354
4	Oct	200000	50000	6500	0	6500	1625

If there is no turnover during any tax period, reversal of input tax credit be taken as per previous tax period.

It is also informed about interest to be added to the amount of ( Te ). Rule 43(1)(h) of the CGST Act in this regard is reproduced “the amount T_e along with the applicable interest shall, during every tax period of the useful life of the concerned capital goods, be added to the output tax liability of the person making such claim of credit.”

F. Change in use of Capital Goods ( Provisions apply till 31-03-2020 )

If the Capital Goods had been purchased for initially used for making taxable supply but later on the same Capital Goods was used for making both taxable and exempt supply and likewise if the Capital Goods had been purchased for initially used for making exempt supply but later on the same Capital Goods was used for making both taxable and exempt supply then how the reversal of input tax credit be done as per rule 43, is explained as under:

In both cases we shall have to calculate value of A ( common input tax credit ) out of input tax credit paid and, availed or not availed, at the time of purchase.

The value of ‘A’ shall be arrived at by reducing the input tax at the rate of five percentage points for every quarter or part thereof.

In second case the input tax credit was not availed at the time of purchase, the value of A shall be credited to the Electronic Credit Ledger also.

The example for this matter is that the person purchased capital goods in the month of July 2018 for Rs.100000/= to be used for making taxable supply and availed input tax credit of Rs.18000/= in the month of July 2018. In the month of Feb 2019 he has started use this capital goods for both taxable and exempt supply. Here he used capital goods for taxable supply from July 2018 to Jan 2019 for two and part of the third quarter. The provisions of Rule 43 say that “The value of ‘A’ shall be arrived at by reducing the input tax at the rate of five percentage points for every quarter or part thereof.”Thus value of A in this case shall be 15300/=18000 –{ ( 18000 * 5% ) * 3 }

After determined the value of A further calculations shall be done on same formula as stated above to calculate Tc, Tm, Tr and Te.

G. Changes in Rule 43 vide Notification No.16/2020 – Central Tax dated 23-03-2020

The changes have been made in sub-clauses (c) and (d) of sub-rule (1) of the rule 43. Sub-clause ( f ) of sub-rule ( 1 ) of the rule 43 has been omitted.

The changes have been made in regard of :

I. Change in amount of input tax to be credited in electronic ledger in case of Capital Goods earlier used for supply of exempt goods and later the capital goods used for both supply taxable and exempt – Before amendment amount of input tax to be credited was after reducing amount of input tax for period for which period the capital goods was used for supply of exempt goods.

After amendment amount of input tax shall be credited by the amount of tax reflected on the invoice subject to the condition that the ineligible credit attributable to the period during which such capital goods were covered by clause (a),denoted as ‗Tie‘, shall be calculated at the rate of five percentage points for every quarter or part thereof and added to the output tax liability of the tax period in which such credit is claimed.

II. Change in amount of input tax to be taken in common input tax –

Before amendment amount of input tax to be taken in common input tax was the amount after reducing the input tax at the rate of five percentage points for every quarter or part thereof for the period for which the capital goods was used either for supply of exempted goods or supply of taxable goods.

After amendment amount of input tax to be taken in common input tax is the amount of input tax pertaining to the Capital Goods.

To understand such changes read the following examples –

		Capital Goods, earlier used for exempted supply, is used for both supply exempt & taxable		Capital Goods, earlier used for taxable supply, is used for both supply exempt & taxable
S.No.	Particulars	After Amendment	Before Amendment	After Amendment	Before Amendment
1	Date of Purchase	01/04/2020	01/10/2019	01/04/2020	01/10/2019
2	Amount of Purchase	100000.00	100000.00	100000.00	100000.00
3	Amount of Input Tax	18000.00	18000.00	18000.00	18000.00
4	Amount of Input Tax taken in electronic credit ledger	0.00	0.00	18000.00	18000.00
5	Capital Goods used for exempt and taxable supply on	01/10/2020	31/03/2020	01/10/2020	31/03/2020
6	Amount of Input Tax taken in electronic credit ledger [before amendment after reducing 5 percent per quarter (18000- 1800)]	18000.00	16200.00	0.00	0.00
7	Ineligible credit for period of two quarters @ 5 percent shall be taken in output tax liability	1800.00	0.00	0.00	0.00
8	Amount taken in common credit [before amendment after reducing 5 percent per quarter (18000- 1800) = A ]	18000.00	16200.00	18000.00	16200.00
9	Total Common Input Tax Credit = Tc	18000.00	16200.00	18000.00	16200.00
10	Tm = Tc / 60	300.00	270.00	300.00	270.00
11	Useful Life of Capital Goods from the date of invoice	Five Years	Five Years	Five Years	Five Years

To reach to me for any suggestions, rectifications, amendments and/or further clarifications in regard of this article my email address is pkmgstupdate@gmail.com.

(Republished with Amendments)